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Investing over the life cycle with long-run labor income risk

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Author Info
Luca Benzoni
Olena Chyruk
Abstract

Many financial advisors and much of the academic literature often argue that young people should place most of their savings in stocks. In contrast, a significant fraction of U.S. households do not hold stocks. Investors typically hold very little in stocks when they are young, progressively increase their holdings as they age, and decrease their exposure to stock market risk when they approach retirement. The authors show how long-run labor income risk helps explain this evidence. Moreover, they discuss the effect of long-run labor income risk on the valuation of pension plan obligations, their funding, and the allocation of pension assets across different investment classes.

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Publisher Info
Article provided by Federal Reserve Bank of Chicago in its journal Economic Perspectives.

Volume (Year): (2009)
Issue (Month): Q III ()
Pages: 29-43
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:fip:fedhep:y:2009:i:qiii:p:29-43:n:v.33no.3

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Related research
Keywords: Income ; Stock market ; Labor market ; Wages;

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    Other versions:
  3. Luca Benzoni & Pierre Collin-Dufresne & Robert S. Goldstein, 2007. "Portfolio Choice over the Life-Cycle when the Stock and Labor Markets Are Cointegrated," Journal of Finance, American Finance Association, vol. 62(5), pages 2123-2167, October. [Downloadable!] (restricted)
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  7. Luca Benzoni & Pierre Collin-Dufresne & Robert S. Goldstein, 2007. "Portfolio choice over the life-cycle when the stock and labor markets are cointegrated," Working Paper Series WP-07-11, Federal Reserve Bank of Chicago. [Downloadable!]
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  14. Tano Santos & Pietro Veronesi, 2006. "Labor Income and Predictable Stock Returns," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 19(1), pages 1-44. [Downloadable!] (restricted)
  15. Carroll, Christopher D. & Samwick, Andrew A., 1997. "The nature of precautionary wealth," Journal of Monetary Economics, Elsevier, vol. 40(1), pages 41-71, September. [Downloadable!] (restricted)
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  16. Kjetil Storesletten & Chris Telmer & Amir Yaron, 2007. "Asset Pricing with Idiosyncratic Risk and Overlapping Generations," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(4), pages 519-548, October. [Downloadable!] (restricted)
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